When is it Time to Refinance?

Joe Schwartz

Joe Schwartz

Mortgage Loans Editor |

Save money by knowing when to refinance.

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Refinancing is an excellent way for homeowners to save thousands on their mortgages. Unfortunately, the industry is fraught with bad information and unmet expectations. So, before we determine if refinancing is right for you, let’s first talk about what refinancing is.

What is Mortgage Refinancing?

Refinancing is essentially taking out a new loan to pay off a current mortgage. The main benefit of refinancing is to essentially to have a new mortgage with a lower interest rate than your current one. This allows homeowners to save thousands of dollars of interest payments. Thus, making mortgage refinancing an attractive offer.

What’s in it for the Banks?

It’s important to understand what banks get out of refinancing. Banks make money on refinancing in 3 ways:

● Fees and Interest
Origination fees for refinance loans are paid for by the consumer, and represent a healthy profit to the banks. Also, refinance loans tend to extend the life of the mortgage in exchange for lower monthly payments. You will typically see a family with an expensive 15yr mortgage, have their payment drastically reduced when they switch to a 30-year mortgage. While this allows flexibility to the customer, it ultimately will cost them more to keep their home in the long run.

● Lien Position
In the event of a Foreclosure, a refinanced home will have a much lower likelihood of going into a foreclosure auction. Refinancing allows banks to maintain total control of the home, rather than be forced to work with the struggling family.

● Commissions
Like any product, a sales agent will earn a healthy commission on each successful refinance package they sell. This is important to keep in mind, as the person you are talking to over the phone will try to upsell you as much as possible. Beware of benefits such as “grace periods” and “unemployment insurance” products. These will dramatically increase the total cost of your refinance package.

Who should refinance their Homes?

Due to the costs associated with refinancing, it’s best to refinance when you are certain you want to maintain in the home long term. You will also only want to refinance your loan if you are going to be reducing what you will be paying in the long term. For example, If you are refinancing after paying for 5 years, you’ll want to refinance into a 25 yr loan. The banks will try to tempt you into signing on a full 30-year loan, but this may simply a ploy to sign you on for longer. Don’t allow the banks to tack on an extra 5 years onto your mortgage, no matter how attractive they make the offer.

Beware of mortgage companies who only offer 15- or 30-year refinancing terms. If a lender is unwilling to work with you on a 25-year refinance, please consider taking your business elsewhere. No reputable bank or loan service will refuse to work with you if you are only interested in a 25-year term. Be aware of Equity Dependent Refinancing

While shopping for refinancing, you may be asked to make a down payment towards the new loan. This typically only happens when you have not built up enough equity in your home to qualify for refinancing. So a down payment isn’t going towards a new mortgage per se, it’s simply going to be used to pay off your current mortgage, thus giving you a little extra equity.

What Types of Refinancing Loans Exist?

There are two types of refinancing loans: Rate and Term & Cash Out. Let’s take a look at both in a bit more detail.

● Rate and Term Loan Rate and term refinances enable you to lower the interest rate or change the loan term with the best available interest rates. This type of refinance lets you take out the lesser of 2 percent of your loan amount or $2,000.

● Cash Out Cash-out refinances let you change your term and interest rate and allows you to take more equity out of your home. You may have to bring cash to close for a rate and term loan, but that usually isn't required for a cash-out refinance.

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